What Happens When A City Declares Bankruptcy

San Bernardino is expected to become the third California city in the past month to file for bankruptcy. That follows Stockton and Mammoth Lakes. Even after layoffs and cuts to public employees' pay and pensions, officials in San Bernardino said the government could not cover upcoming bills. So what happens now to city services like police and fire protection, garbage collection, road repairs? Who gets paid, and who doesn't? If you have questions about municipal bankruptcy, give us a call, 800-989-8255.

Email us: talk@npr.org. You can also join the conversation on our website. That's at npr.org. Click on TALK OF THE NATION. Joining us now is Phil Batchelor on the phone from Vallejo, California, where he formally served as the interim city manager to help that city get out of bankruptcy. Nice to have you back on the program.

PHIL BATCHELOR: Thank you, Neal.

CONAN: Is bankruptcy protection a get-out-of-jail free card?

BATCHELOR: No, it's not. When you declare bankruptcy, you don't suddenly get a free pass that allows you to abdicate responsibilities for providing municipal services.

CONAN: So what's the priority list? Who gets what?

BATCHELOR: Well, once you've declared bankruptcy, you still have the obligation to get your fiscal house in order. You still have to balance the budget. You still have to settle with the claimants. You still have to pay your legal bills, and you still have to deal with your unfunded liabilities.

CONAN: Unfunded liabilities, those are pensions for the most part?

BATCHELOR: Yes.

CONAN: And bonds, to pay off previously issued bonds, perhaps?

BATCHELOR: Yes. This is part of the claimants.

CONAN: What does the bankruptcy protection then give you? Does it give you the right to negotiate with your creditors to say we'll give you X pennies on the dollar?

BATCHELOR: It provides a couple of things. One, it buys some time. Two, is it brings all parties to the table - the vendors, the claimants, the bankers, the employee organizations, even individual employees and retirees. They all can have a seat at the table. And it brings an independent third party to preside over it.

CONAN: And...

BATCHELOR: This is the judge, the bankruptcy judge.

CONAN: And so if the union and the city council can't come to an agreement, the judge decides?

BATCHELOR: Yes. But the judge wants you to be able to work it out with the claimants. For example, when we filed for bankruptcy, we had, in Vallejo 1,013 claims filed against us; and we had $382 million in outstanding liabilities in these claimants. That's what they claimed that they were due. And so when I was brought in, I was asked to help get the city out of bankruptcy. And what we did is we sat down with the attorneys that represented the other parties, and we began the long process of what can we do.

I think, you know, you ask the question, perhaps, why do organizations get into these kind of situations where they have to declare bankruptcy? I think there's two things. One is they abdicate responsibility for their own destiny. They enter into long-term agreements, contracts, MOUs that...

CONAN: MOUs are memorandums of understanding?

BATCHELOR: Yes. And the second thing is, I think, there is not a positive trusting relationship between the bankers, suppliers, vendors, employee organizations. They don't trust you. And so part of the process is when you're sitting at the table, do they believe you? Well, if they don't believe you, then they're calling for an outside third party to come in, and thus, we get into bankruptcy. But when you're sitting there and a judge is presiding over it, it sort of says, all right, let's get down to business, let's see the numbers, we understand them, and now what are we going to do?

For example, when the city of Vallejo declared bankruptcy, they had to balance the budget. They were spending more each year than they were bringing in.

The result, they closed three out of eight fire stations. And that increased the response time to respond to a medical emergency or a fire. They kept the fire department by 42 percent of the number of employees they had. The police department, they reduced the number of sworn officers from 155 down to 90. They cut the department by 47 percent. Now, they still have to provide police protection and fire protection and medical protection and garbage and everything else that a city is responsible for. But they have less assets to do it with.

BATCHELOR: Absolutely. The roads become - unless you're getting outside funding from the state or federal government, the interior roads within a city will not probably be paved. The potholes will get worse. And if they deteriorate enough, then you'll have to rebuild the road completely, which will cost you many times as much as maintaining it properly in the first place.

CONAN: What happens to the psychology in a city that's in bankruptcy?

BATCHELOR: When there's a label put across a city or a county or a special district that says, you're in bankruptcy, it equates in the minds of the public to dysfunction. You couldn't manage your own business, so you end up in bankruptcy. And it is very difficult for the employees. They don't want to be associated with a dysfunctional organization. It destroys morale.

CONAN: And I assume their pay has been cut as well. There is a question of, are people even going to show up for work?

BATCHELOR: Yes, their pay will be cut. Their benefits will be cut. They will be in a department that has, perhaps, 10 people. And suddenly they have five or six people that have to do the work. And so they're being asked to do more, get paid less and be associated with a dysfunctional organization.

CONAN: And there is then the city's reputation. One of the ways you're always - one of the things you're always trying to do is to attract investment, to attract new businesses.

BATCHELOR: Absolutely. You want to invite business to come in. You want to be business friendly. You want people to come and to establish their business in your entity. It brings in jobs. It brings in tax revenues that help pay the bills. And when you have a label of bankruptcy, it makes it very difficult for people to get serious about relocating to your jurisdiction.

CONAN: We're talking with Phil Batchelor, former interim city manager for Vallejo, California, hired in 2010 to help that city escape bankruptcy, which it filed for back in 2008.

800-989-8255, email us: talk@npr.org if you have questions about municipal bankruptcy, an option taken or at least sought by three California cities just this month. And we'll start with Alan(ph). Alan on the line with us from Williamsburg in Virginia.

ALAN: Yes. How did Vallejo get into that situation that caused it to go bankrupt?

BATCHELOR: There were several things that happened. It didn't just happened overnight. It didn't just happened a year or two years before they file for bankruptcy in 2008. It was building up over a decade.

The city council had entered into agreements, multi-year agreements with their employee organizations, that they would continue to pay salaries based on a formula. The formula was what other cities did. We'll pay the average of what these cities pay. That abdicates your responsibility.

Second thing is, the city got into a situation where the unemployment rate began to soar above 15 percent, and businesses were having a very difficult time. The main business in the city, which was Mare Island and naval base closed, and many of the jobs disappeared. And so high unemployment reduced value of the housing stock. Between 2006 and 2009, housing stock value dropped by 67 percent.

CONAN: Now, a lot of places that had bases that closed were able to try to, you know, create enterprise zones to leverage that base into an economic opportunity.

BATCHELOR: True, but the state has taken away a lot of the ability to have enterprise zones, to have redevelopments. In fact, the state just took the ability to have redevelopment agencies that help blighted areas to come back. It just took the revenue from all 400 redevelopment districts in the state. It did away with them this last year.

CONAN: Alan, thanks very much for the call.

ALAN: Thank you.

CONAN: And you mentioned cuts. Obviously, that's part of a solution. The other part is to increase revenue. Were taxes raised?

BATCHELOR: Yes. Because we were able to gain the confidence of the citizens and community leaders, we were able to pass a tax measure that raised $10 million a year for 10 years. It just passed, but it said we have the confidence that you can do better in the future. We were able to get the city out of bankruptcy November 1 of 2011. We began the rebuilding process of opening a new fire station, of adding firefighters, of adding some police officers. And this was because the citizens said we trust you enough, and let's rebuild and let's have a better city in the future.

CONAN: Was there a political price to pay, those who are in office when bankruptcy was declared?

BATCHELOR: Yes, there's always a political - many of the people who were in office when the years leading up to it are gone. And we have new council members that have come in and helped to rebuild the city.

CONAN: And council members, this is a city manager form of government?

BATCHELOR: It is. It's a - has a charter and the city manager is responsible for the operations and running of the city. And the city council, in this case, five members, they set policy and direction and leadership.

CONAN: Phil Batchelor, the former interim city manager for Vallejo, California. We're talking about municipal bankruptcy. You're listening to TALK OF THE NATION from NPR News.

And let's go to Royal(ph). Royal with us from here in Washington, D.C.

ROYAL: Well, thank you very much for taking my call. The - you're absolutely correct as far as the - the actual question you're asking. But one of the things I think that you really need to address - and your guest can probably do a far better job exploring this than I can - is this, you have to deal with the fact that everybody who has a claim wants to be primary. Everybody wants a dollar for their dollar. And there's a great deal of competition.

And the first thing that happens in bankruptcy is everybody gets to be introduced to what a federal bankruptcy judge is, which is probably less powerful than God, but certainly the voice of God. And you need - one of the benefits in bankruptcy is the fact that you get a very clear indication that you can't just grandstand. This is going to be resolved. And, you know, everybody has a voice, but nobody gets the loudest voice.

CONAN: Except the judge apparently.

ROYAL: Well, if your guest can comment on that. But I can certainly say - having represented several people for bankruptcy, I say, listen, when, you know, you got to change your whole vocabulary now that we're, you know, in bankruptcy. And you get to say things like, you know, I got to take care of my kids. I mean, you know, the grandstanding, the hyperbole, if you will, that leads up to bankruptcy, that gets thrown out the window because there's just no room for it. There's no - and that's sort of one of the benefits of bankruptcy.

And there's a lot of reasons why you don't want to go into bankruptcy. But when you have a very strong union, particularly the fire department and particularly the police department, sometimes, bankruptcy is a godsend to a local jurisdiction because nobody has the brass body parts to stand up and say, look, the answer is, no, and we mean it. Because as soon as you say, no, and money - we don't have the money for it, strong unions start complaining, lying and suggest you don't believe in fire departments, you don't believe in your own police, you don't believe in good teachers. And it's just - you can't keep control of the situation.

CONAN: Phil Batchelor?

ROYAL: What happens...

CONAN: Well, let me just ask Phil about his experience.

BATCHELOR: The caller's comments are insightful. We had $382 million in claims. We had $6 million to settle those claims, and yet we did it. And we could not have done without a bankruptcy judge saying, get serious and let's get this done. When you're in the negotiation process with the employee organizations, when you say, we can't afford it, we don't have the money, they believe it's part of the negotiation dance. And, thus, are less likely to come to the table. Or they feel it's not their responsibility. The city leaders got the city in this trouble. Let them worry about it.

ROYAL: You know, it's very similar to, if you will, you know, as a parent, you know, if you have children and you say, look, you know, here's what we have for dinner tonight. And they'll say, well I don't want that. What else do you got? This dinner. This is what we made. And they'll say, no, I want - we want something else. You know, particularly with a very - well, part of the problem with unions is, and again, it's a lack of confidence and belief in the leadership and this sort of this - the idea that it's all a game, and lack of real - part of the problem is, from both the politician standpoint as well as from the unions, nobody wants to look at the actual bottom line.

You don't become a successful politician by saying the word no. And you won't be a popular union leader by accepting the word no. So what you have is, on both of the equation, you know, it's like the children watching the cookie jar, and the children who want what's in the cookie jar. Nobody's saying, hey, there's only so many cookies to go around and that's it.

CONAN: Yeah.

ROYAL: I know there's...

CONAN: Phil Batchelor, we just have a few seconds left - and thank you very much for the call, Royal. But I wanted to ask, it's now 2012, what's the experience with bankruptcy been for Vallejo?

BATCHELOR: Well, the experience has been good. We were able to save probably in excess of $30 million, but we had legal bills of over $12 million. But the problem is not just unions or just cities, it's both. They passed legislation that made possible pensions that are unsustainable. As a result, we will see dozens if not hundreds of cities impacted, many who will go into bankruptcy in the next decade.

CONAN: Phil Batchelor, thanks very much for your time. Appreciate it.

BATCHELOR: Thank you.

CONAN: Phil Batchelor, a former interim city manager for Vallejo, California, with us on the phone from that city.

Tomorrow, an inside look at arson investigations. This is TALK OF THE NATION from NPR News. I'm Neal Conan in Washington. Transcript provided by NPR, Copyright National Public Radio.